TCS Daily

"Real Wage" Slaves?

With the economy growing rapidly and the unemployment rate hovering around 5 percent, it's getting harder and harder for critics to find current economic statistics about which they can register concern. Gone are the days when pundits (or political candidates) could compare the current economy unfavorably with the 1970s with a straight face. Economic criticism -- dropped with a poker face during the '04 campaign -- has become an exercise in slogging through obscure statistical data to dig up ever smaller "ah-hah" moments.

In a recent column entitled "The Joyless Economy", Paul Krugman argued that "Over the last few years GDP growth has been reasonably good", but "that growth has failed to trickle down to most Americans." He goes on:

"It should have been a good year for American families: the economy grew 4.2 percent, its best performance since 1999. Yet most families actually lost economic ground. Real median household income - the income of households in the middle of the income distribution, adjusted for inflation - fell for the fifth year in a row."

Apart from anything else, the "lost economic ground" to which Krugman refers is so statistically insignificant that the Census Bureau release states that real median household income "remained unchanged between 2003 and 2004 at $44,389", and that 2004 was "the second consecutive year that households did not experience an annual change in real median income". The drop to which Krugman referred was a $93 change that fell well within the Census Bureau's $126 margin of error. "The Median Household lost statistically insignificant economic ground" doesn't have quite the polemic ring to it, though.

When times are good and statistical sledgehammers are scarce, "statistically insignificant" will have to do. But since it will do -- and the Democratic Party is already arguing that wages are flat and "the Bush economy is not working" for working Americans -- it's best to address it head on before it becomes uncontested common knowledge.

Craig Marxsen addressed one of the reasons for the occasional decline in real wages recently in TCS, writing that environmental regulations "took a heavy toll" by both driving costs up and depressing multifactor productivity. Those intrusive regulations have certainly been a significant component in restraining the growth of real wages, but let's not cede the march to the critics by granting critics a focus on real wages just yet.

First, there's a statistical sleight of hand here: workers earn wages, but that's not all they earn. In recent decades, compensation composition has changed, with benefits now accounting for 32.2 percent of compensation costs. This is sometimes known as the total compensation package.

Focusing on real wages -- which accounts for changes in inflation, but doesn't account for compensation that helps to cover those increased costs -- obscures the fact that total compensation has increased faster than inflation. In fact, total compensation has been growing faster than it did during much of the latter half of the 1990s, while inflation, though more volatile, has remained about the same.

[Nominal Total Compensation Growth]

And Real Compensation per hour hasn't been slacking in recent years, either... [graphic courtesy of the St Louis Fed]

But what about that "Median Household" about which Professor Krugman was so concerned? Aside from the mitigating factor of increasingly smaller households -- a 1996 Census Bureau report noted that previous "stagnation in median household income may, in fact, be largely a reflection of changes in the size and composition of households rather than a reflection of a stagnating economy" -- it's worth noting that more specific measures of Median Household Income often tell a different story. In the Census Bureau's 2005 Report on Alternative Income Estimates in the United States: 2003, it's true that Median Household Income fell by one tenth of one percent when measured simply as "Money Income".

Finally, it's also worth noting that Real Disposable Personal Income -- the inflation-adjusted portion of compensation that we the proletariat get to pocket (i.e., spend or save) -- has risen by 3.1 percent, 2.4 percent and 3.4 percent over the past three years.

But still, what about those stagnant wages? It's a testament to the immutable characteristics of economists and politicians that, good times or bad, the capacity to find data that supports their conclusions remains undiminished. In good times, they just have to dig a bit deeper. Remember 1996? In the midst of the remarkable economic expansion of the 1990s, a campaign brochure for Republican Presidential candidate Bob Dole argued that "the real wages of American workers remained completely stagnant". The "real hourly wage", Dole also argued during that campaign, "is 5 percent lower than it was a decade ago." When data-mining critics worry that wages are stagnant and that the economy is not "working" for working Americans, perhaps we should just agree with them: yes, things really are as bad as they were in the 1990s.